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After a turbulent month for U.S. large-cap stocks (S&P 500), they ended the month with a gain of 1.22% while small caps (S&P 600) surged 10.80%. On the international front, developed-market international stocks (MSCI EAFE) rose 2.93% while emerging-market stocks (MSCI Emerging Markets) fell 0.30%. The Bloomberg U.S.��Aggregate Bond Index, a broad measure of bonds, rose a healthy 2.34%.^*

WHY IT HAPPENED

The S&P 500’s positive end in July belies its volatile month. Leading consumer and communications stocks like Tesla, which helped push the index to recent record highs, and Alphabet (parent of Google) underwhelmed during their latest earnings calls, sending the shares sharply lower and dragging the index along with them.

Confidence that some of the index’s tech leaders, like Nvidia, could live up to lofty earnings expectations was also shaken and their shares fell as well. However, optimism revived at the end of month, with Big Tech stocks surging partly on earnings reports.

However, small-cap U.S. stocks were the big winners as they posted their best monthly return since December. Why? Smaller companies may stand to benefit from lower borrowing costs if the Federal Reserve starts to cut interest rates.

Hopes for rate cuts got a shot in the arm in mid-July when the Consumer Price Index report showed inflation continued to moderate toward the Fed’s targeted level. Later in the month, a second measure of inflation, the Personal Consumption and Expenditures Price Index, confirmed a moderating inflation picture. Given those latest updates on inflation, the market’s expectations rose from two rate cuts before the year is over to a strong possibility of three.

On the last day of the month, the Fed said that while it wasn’t cutting rates immediately, progress had been made in fighting inflation. This further fueled hopes of imminent rate cuts, possibly at its next rate-setting meeting in September.

What you should be thinking about

July’s performance is a reminder that the market is subject to sudden shifts. For example, the market’s gains had been led by large caps in June, but in July, the robust gain by small caps eclipsed large-cap gains. The media have talked about a “rotation” in the market, where different types of stocks take the lead, in this case small caps.�� It’s difficult to say if and especially when a rotation will occur (and it’s too early to say one has actually occurred).�� Where markets will shift and for how long can be impossible to predict, underscoring the importance of a highly diversified portfolio.����

The unpredictability of a market shift and its duration also underscores the importance of having a long-term focus when it comes to your investment portfolio. After all, the timelines of your financial goals are measured in years, if not decades. If you have questions about your portfolio or if your financial circumstances have changed, reach out to your financial planner.��

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* Index return data provided reflects “total return,” which includes income generated by securities held within the index, such as dividends and interest. Because it includes income, index total returns can differ from index price returns that only consider prices.